What I tell them is to think carefully before taking any action, because the perceived short-term benefits may be overwhelmed by longer-term challenges. Now, I frequently hear from CEOs of our portfolio companies who are seeking guidance on retention equity. I never heard about retention equity when companies were exiting in a few years, but it’s becoming a big issue as the time to exit lengthens. Hence, more pressure on management to offer retention equity. These employees may not understand the difference between public company RSUs and private company stock options and are likely to desire a program in which they receive ongoing grants. As companies mature, they start to hire from larger public companies whose employees may be accustomed to receiving RSUs (restricted stock units), which give employees equity on an annual basis but are less costly to the equity pool. It’s not only an issue with early employees. When that happens, management can be tempted to sweeten the pot with additional options – or retention equity. So that four-year vesting window doesn’t reach the exit point. Today, however, we’re seeing companies exit in eight to 10 years, or even longer. Back in the 1990s and early 2000s, most companies were exiting in four to five years, which meant employees were able to realize the value of those options fairly quickly. In most cases those options are fully vested in four years. The Long Road to Exit Leads to Retention Equityįor decades, it has been standard practice in startups to grant employees stock options as a major element of compensation.
That’s why founders of young, private companies must pay close attention to three topics when devising their compensation strategies: So, equity takes on an outsized role in compensation plans.įollow-on grants of stock options are sometimes used to retain key employees, but without proper planning and a clear strategy, such “retention equity” can lead to unintended consequences, disgruntled employees, conflicts with the board, and depleted coffers. Most startups must be careful about how much money they allocate to salaries, and promotions to more senior positions are limited when total employment is only in the low hundreds. Retaining top talent is an escalating priority for companies of all sizes, but early-stage startups have a narrower range of tools to achieve this goal compared to large, established enterprises. She offers her observations about why, when, and how startups can use retention equity as a compensation tool. She has more than 20 years’ experience in leadership recruiting and human resources development. Teri McFadden is a Principal for Talent & Retention in Norwest’s Portfolio Services team.
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